Tuesday, August 11, 2009

Time To Ante Up

Richard Rodier, hired legal gun and mouthpiece for Jim Balsillie, famously (or infamously, depending on your perspective) called the legal situation surrounding the bankruptcy of the Phoenix Coyotes "a lawyers wet dream". After reading through the bid procedure order issued by Judge Redfield Baum's bankruptcy court, I would have to agree with Rodier. This case is rife with legal arguments that could go on for years, and every lawyer associated with each side has to believe they have hit the jackpot when it comes to billable hours on this one. Motions and counter-motions are being filed by each side in an attempt to bolster their position before the auction date on September 10th, and James Mirtle in his On the Rink blog has outlined the NHL's initial response to the Balsillie camp and their claims that Balsillie and PSE should be allowed to bid on the Coyotes. One thing we can count on is that there will be more and numerous filings to come.

After reading the bid procedure order, there were some salient points that emerged that bear emphasis. First, any bidder has to complete a standard NHL ownership application and submit it to the NHL as well as a confidentiality agreement (whoops- somebody tell Jerry Moyes' attorneys), and a term sheet outlining the proposed bid. The delivered documents qualify the party as an "Acceptable Potential Bidder" for the purposes of the bankruptcy court. Each Acceptable Potential Bidder must submit their bid to the court by August 25th accompanied by a purchase agreement which will constitute an irrevocable offer to buy the assets. The money clause in this part of the order is,

"The purchase Agreement shall include as a condition of theDebtors obligation to consummate the sale of the acquired business, approvalby the NHL under the Constitution of the NHL (the "NHL Constitution"), theby-laws of the NHL (the "NHL by-laws") and all other applicablerequirements."

Uh, Hamilton, we have a problem. Balsillie and his legal minions have shown through past acts that they have no regard for the NHL constitution and in their eyes, the rules are for other guys. Incorporating the specific references to the NHL constitution and by-laws into the bid purchase order signifies, in my opinion, that the court is going to give significant weight to the governing rules of the NHL.

There is a good faith deposit required of $10MM required of all qualified acceptable bidders, and additionally, all bidders must show the court that they have the financial wherewithal to close the transaction. The Balsillie/PSE bid certainly meets this requirement as it is an all cash bid. The Reinsdorf bid includes no cash, and the specifics of the potential Ice Edge Holdings bid are not known.

Interestingly, the court is auctioning two groups of assets on the 10th: Coyotes Hockey LLC, which includes the hockey club and the assets that are specific to the club; and Arena Management Group LLC, which is the Jobing.com arena operating entity. Bids will be accepted for both entities to continue operations in Glendale, however, a relocation bid can bid on the hockey club only and does not have to bid on the Arena Management Group. If city leaders in Glendale were not nervous before now, I would certainly think they would be knowing that the anchor tenant in the $180MM facility could move on and revenue streams from that facility could be severely diminished.

Section A.18 of the order provides that the bidder and the transaction to buy the asset(s) will comply with and be approved under section 3.5 and 3.6 of the NHL constitution and NHL by-laws 35 and 36. Furthermore, this section states that the successful bidder will execute a Standard Consent Agreement with the NHL. Section 4(c) of that consent agreement states that the acquiring party "covenant and agree that for a period of 7 calendar years from the purchase date they will not move or transfer the franchise to a new home territory". Again, the court, in structuring this order, has appeared to place a point of emphasis on the rules set forth by the constitution and by-laws of the NHL.

Section 6 of the bid procedure order outlines the identification of the successful bidder. At the close of the auction on September 10th, representatives of the NHL, the creditors committee, and the debtors (Moyes) will recommend to the court which qualified bidder had the highest and best bid. Now, I don't know about you, but I would buy a ticket to watch that little conference. If there is no agreement, then it will be submitted back to Judge Baum, and he will make the final decision.

Running concurrent with this process is a relocation bid process, which requires submission of bids on or prior to August 24th. This process is identical to the bid process for parties that propose to keep the team in Glendale with the exception that the NHL has to notify any bidder of their approval by the League by September 2nd and the League must notify the potential bidder at that time of any proposed relocation fee. Ah yes, the relocation fee. Early on in this process, numbers were bandied about, but this has been in the background since the NHL believes the franchise will stay in Glendale. This will be the subject of much speculation if a relocation bid is awarded, but should this occur I would guess the fee would be north of $200MM if the franchise goes to Hamilton (purely speculation on my part). Obviously a winning relocation bid will negate the 7 year stay provision outlined in the Standard Consent Agreement with the NHL, but will come in to play once, and if, the franchise were to be relocated.

Reading the bid procedure order defines the parameters of the process leading up to the auction on September 10th. There are numerous references to the NHL procedures, Constitution, and by-laws in the order. This leads me to believe that Judge Baum is going to give serious consideration to the right of the NHL to conduct its business as it sees fit. Judge Baum also has a fiduciary and legal duty to realize maximum value for the assets that are being auctioned. The serious battle will occur prior to the auction as Judge Baum has to determine if the best bid on paper is actually an acceptable qualified bid. The Judge is still on the high wire and without a net.